New pensioners approaching retirement are set to shun annuities

THE VAST majority of people coming up to retirement say they will not use their pension pot to buy an annuity.

Those about to retire should ensure that they don’t outlive their savings[ALAMY]

This follows the announcement of Government plans in last month’s Budget to give savers more freedom over how they use their pension funds to finance their later years.

From April 2015, pension savers will have greater scope to keep their money invested in the stock market and other assets.

They will also be able to take cash out of their pensions to spend as they wish, without facing punitive tax penalties as they currently do.

Buying an annuity is the most common retirement option at present.

This means most or all of the pension pot is swapped for a guaranteed monthly income for the rest of the customer’s life.

However, new research from accountant PwC has found that only 16 per cent of those aged between 50 and 75 now plan to buy an annuity.

The firm said that this could lead a 75 per cent decline in the UK annuity market.

Yet experts are warning that people who shun the security offered by annuities could be exposing themselves to unnecessary financial risks in their old age.

Recent research from retirement income firm MGM Advantage found that a major financial concern of more than two-thirds of over-55s was running out of money later in life.

The company also found that more than 80 per cent of those approaching retirement routinely underestimate how long they will live for.

On average, men aged between 55 and 64 say their life expectancy is 81 years, while official figures suggest those in this age group will typically live until 86.

Women aged between 55 and 64 expect to live until 79, whereas the official forecast is 89.

Buying an annuity is currently the most common retirement option [GETTY]

The cost of delay needs to be considered, as does the potential for annuity rates to go down in the future

MGM Advantage spokesman Aston Goodey

MGM Advantage spokesman Aston Goodey said: “It is important that people have a realistic expectation as to how long they are likely to live so that they can make adequate provision for retirement.

“The Budget has changed the pensions landscape forever, allowing people more freedom and choice with their pensions.

“But with increased choice comes the risk that individuals may live longer than they anticipated, meaning they may outlive their retirement savings.”

Goodey added that older people faced a decline in living standards if their pension investments could not continue to provide the income they needed.

“The reality is simple,” he said.

“There is no other product in the market that offers such a high rate of return for life as an annuity.”

City watchdog the Financial Conduct Authority (FCA) has now issued guidance to advisers whose clients are approaching retirement in the coming months.

The FCA is concerned that people will not be given sufficient warning of the dangers of delaying a potential annuity purchase until a later date.

Anyone who waits runs the risk that annuity rates will fall in the interim, with the result that the monthly income they receive is lower.

Equally, rates could rise over this period.

A delay also means that the customer will miss out on income they could have been receiving while they spent time weighing up their options.

Goodey added: “Given the uncertainty in the market at present, it is worth remembering that customers who are looking to secure a sustainable income for life face the same decisions as they did before the Budget and are unlikely to get a different outcome now to post-2015.

“The cost of delay needs to be considered, as does the potential for annuity rates to go down in the future.”

He said it was not yet clear whether the Budget would lead to a fall in annuity rates as a result of lower demand.